Right, Mr Packer, that one jet to the US, full in cabin service, full service for medical team, landing rights in New York, take-off fee in Sydney. That will be $42,380 plus GST of $4238.”
“”What?” bellows Packer. “Me. You mean I have to pay tax at 10 per cent. I’ve never paid tax at that rate before. I pay exactly how much tax the law requires, not a penny more not a penny less. I’m not a mug.”
“”I’m sorry Mr Packer, the plane does not fly unless the tax is paid.”
What a joyous scene. A GST would mean that legal minimisers would have to pay tax as they spend their income. Of course, they do so now in the form of sales tax. But this does not apply to services, like the hiring of aircraft, hotel rooms, restaurant meals, haircuts, dry-cleaning, professional fees by architects, lawyers and surveyors, trade services like plumbers and so on. Richer people tend to use services more than poorer people.
On the other hand GST would reduce the price on lots of things richer people buy more of — furs and luxury cars. And it would increase the price on things that the poor spend more of their income on, especially food and clothing. The table shows the sorts of goods in each percentage category.
The details of the GST are yet to be made public, but the main arguments is obvious.
Will the 10 per cent on food and clothing be adequately compensated by income-tax cuts and extra welfare? Children, who do not earn income, consume a lot of food and clothes. So income-tax cuts alone will not be enough. Child-directed compensation may be necessary. My guess is that there will be none for high-income earners, but they are likely to get bigger income-tax cuts.
Another less obvious argument will be over who will get the efficiency dividend from the GST. The present wholesale taxes are a mess. The table makes it look more simple than it is.
Note “”medical” in the 0% column. Note “health goods” in the 22% column. The distinction is a fine one. Hand lotion is taxed at 22 per cent. Burn cream is taxed at 0 per cent. Some of the distinctions are absurd. Flavoured milk is at 12 per cent; pure milk is at 0 per cent. A swimming pool filter is at 22 per cent a rain-water filter is at 12 per cent. A spinning wheel is at 12 per cent, but an electric spinning wheel is (probably) 22 per cent. A computer terminal attached to a mainframe is 0 per cent and stand-alone computer is a 22 per cent.
Often the tax will depend on how the item is marketed.
It is a very costly to administer. Scrapping it and replacing it with one rate will save a huge amount of money. Who will get it?
Another argument will be about why some things are not embraced by what has been portrayed as a tax on everything. It is not a universal tax. It is a tax on the CONSUMPTION of goods and services. It applies to the end user of the goods or services. (So it does not apply to exports, unlike wholesale taxes, and it applies to imports.)
It is not a transaction tax. It does not apply to the sale of land or shares because land and shares are not CONSUMED. The building materials in a new house, however, are consumed and a GST would apply to them. Typically, a builder would pay the tax as he buys various items from building suppliers and on selling the house for the first time, the buyer would pay full GST and the builder would get a rebate of all tax paid as he went. Strictly speaking GST should not be paid on second-hand items because they have already been taxed and, at least technically, been consumed.
Just as land and share sales are not hit by a GST, nor are foreign-currency transactions or the movement of money in and out of bank accounts.
Unfair, you might cry. True. But to fix that unfairness you do not apply a GST to them, rather you increase or apply transaction taxes to them. You then have to ask what will be the effect of doing so.
With a GST we get efficiency, we tax services (hitting the rich and tourists), we tax imports more and exports less but hurt people who spend a lot of their income on food.
With higher transaction taxes we might slow the movement of land, shares and money to good or bad effect.
Tax reform must be a two-way street. Governments must avoid underhand ways of shifting tax burdens and voters should not fall for emotional campaigns.